Monday, December 27, 2010

as was apparent last week, there was no agreement on a budget for the federal government, so a "continuing resolution" to keep the show running was passed by the senate...what that does is fund all ongoing programs at the same level as they were funded for the fiscal year beginning Oct 09, until Mar 4 2011... that means no funds for any of the new programs passed this year, such as health care reform, or the Dodd-Frank financial regulation...the SEC has interviewed and needs to hire 800 new investigators to carry out their new duties under dodd-frank, but the money aint there, and one can surmise that other regulatory agencies are feeling a similar pinch...however, the senate was able to pass with "unanimous consent" the $725 billion bill to fund the pentagon for fiscal 2011, which included nearly $160 billion for war-funding...

there has been serious talk about the possibility that as part and parcel of the tax cuts for the rich package just passed, obama has agreed to include many of the budget cutting measures outlined by the simpson-bowles catfood commission in next years budget...robert kuttner, the editor of American Prospect & one of the co-founders of the Economic Policy Institute, wrote that cuts to social security would be included, and introduced in the state of the union address in january...according to economist brad delong, who has apparently talked to someone in the white house, the proposed social security package would be 2/3 cuts and 1/3 tax increases, and a Q & A on twitter with white house press secretary robert gibbs seemed to confirm that is the case...there is speculation that medicare is also on the table...

both consumers reports and huffington post had articles out quantifying how many taxpayers would actually do worse under the tax cut package passed last week; approximately 51 million workers make so little that they will actually see an increase in their taxes as of the result of the loss of the $400 making work pay tax credit, and another 20 million state and local workers, who dont pay into social security as they have separate pension plans, will lose that $400 credit and not gain anything in their pay from the payroll tax cut...this means approximately 1 in 3 workers, who are among the lowest paid, will see less take home pay resulting from these "tax cuts"...coincidentally, 1 in 3 working families were also found to be near poverty despite working full time by the working families project; this number included 22 million children...(a chart, with income by family size, is here)...a NYT story revealed that more than a quarter of the new private sector jobs added this year were temporary, compared to 10.9% and & 7.1% in the previous recessions...another study showed that 1.6 million americans at retirement age have put off retiring, and that 1.3 million were still working at 75...this was attributed to better health as we age, but i wonder if all those old walmart greeters are really working cause they want to, or if they see the connection between continuing to work and continuing to put food on the table...

you might have noted that i've been somewhat ambiguous as to how that 13 month extension to unemployment rations would play out in different situations and states; that's because, despite my searching, i couldnt lay my hands on an article that broke it down by all the categories...quite serendipitously, such an article was published this week by the WSJ; here it is: How Long Is Each State’s Unemployment Extension?; you'll see there’s a wide variance in how long an unemployed person can receive rations depending on state contributions & the unemployment rate in their state...

quite a bit of blog commentary followed the CBS 60 minutes segment on state budget problems that aired last weekend, (which i posted on MW666 as another crisis, coming soon to a state near you…); most of it was pushback against the segment, some was in defense of the muni-bond market (which had already been under pressure) after meredith whitney forecast 50 to 100 cities would go belly up next year, and some was just kneejerk reactions from the usual suspects who jump in to rant everytime any government spending is challenged; no one is served by that kind of uninformed commentary...i cant speak to problems facing the munibond market other than to observe the rising costs of borrowing, but i've been on the state/local budget case for almost a year (see here and here), and ive linked to at least two dozen articles each week on state or city budget problems, school district shortfalls, state difficulties with medicaid funding, or pension funding shortfalls on GGO almost every week this year...to be sure, the lion's share of those articles deal with the known problems of california, illinois, new jersey, new york or michigan cities, especially detroit, but i'd venture to say that ive seen at least 30 states mentioned in local papers as facing some kind of funding trouble over the past year...much is made of the california $28 billion deficit, but not too many realize that texas is also facing a $20 billion shortfall over the next two years...absent a return to exuberant growth, in the coming year states will have to find a way to make up for the expiring federal stimulus money which has sustained them for the duration of the recession, and cities and school districts will be facing declining revenue sharing and at least a few more years of declining property tax base, which typically lags the fall in housing prices by three years...at the very least, we can expect to see more "user fees" for city services going forward...

a top bush economic advisor, greg mankiw, took the census results to show that people are migrating to the states where the taxation is lowest, and sited a study on his blog backing this up; he doesnt allow comments on his blog, but if you check the census website http://2010.census.gov/2010census/data/index.php you will see that the state & regional growth mankiw ascribes to escaping from high taxes is no more than a continuation of the same migration trends that have been in effect since 1940 (click bottom bar on the interactive map)

it shouldnt surprise anyone who's read my takes on the effect that QE2 and the tax package have had on interest rates that mortgage applications were down 18.6% for the week, and re-financings were down nearly 25%...reported existing & new home sales for november were up slightly from october but were still dismal, even though the full brunt of the increase in borrowing costs have yet to hit...in light of the robo-signing scandal, foreclosures continue to decline, but since foreclosure sales are also declining, home inventories are still higher than last year at this time (housing is seasonal); declines are concentrated in states where specific action against robo-signing has been taken; in new york, for instance, where an attorney's signature on the paperwork is now required, foreclosures have declined from an 800 per week rate to 100 per week...

oil prices rose above $90 dollars a barrel this week for the first time since 2008, and continued to rise in london after domestic markets were closed for the holiday, briefly reaching $94.74 for brent crude before falling back below $94; OPEC ministers meeting in Cairo judged that prices had been temporarily inflated by cold weather in Europe, and saw no need to increase output; a couple moderate OPEC members switched previous positions, feeling that $100 oil was possible without adversely impacting consuming economies...other commodities also rallied, with coffee, soybeans, wheat and corn all near highs not seen in 2 to 20 years, and raw sugar hitting a 30 year high...several large food processors, including kraft, general mills, kelloggs, unilever, and nestle all either announced price increases, or signaled that increases are coming to some of their product lines; mcdonalds also indicated price increases were forthcoming....we are advised not to worry, though, because the core inflation rate omits food & energy because those prices are too volatile...we can be concerned, though, that cotton futures are at an all time high, up limit three days in a row this week, with the likelihood that another $1 increase will be seen in a pair of jeans; dont plan to switch to wool clothes, either, as wool prices are up about 50% over last year...rubber futures in tokyo hit a series of all time highs on bad weather in producing countries, & industrial metals were also at or near new highs; last week i mentioned that one trader controlled 90% of the copper in the warehouses of the london exchange; this week that trader was identified by zero hedge & barrons to be JP Morgan, as copper hit a new high when a major chilean mine declared it could not meet its contracts...according to the WSJ & barrons, one trader also holds as much as 90% of the LME aluminum, and over 50% of the tin, nickel & zinc as well...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

Sunday, December 19, 2010

after gaining the support of JPMorgan CEO jamie dimon, who stands to save $1,179,000 next year from the tax cut, the GOP-obama tax cut package i discussed last week easily passed the senate 81 to 19, and passed the house thursday night, with 148 congressmen voting against it...moody's immediately warned that it might hurt our triple A credit rating...i dont have a handle on how much pork was ultimately attached, but with the broad acceptance it was probably minimal; the real pork was in the 6700 earmark $1.3 trillion bipartisan omnibus spending bill, which was pulled from the senate floor friday when the anti-porkers were caught with their hooves in the fiscal cookie jar...since a budget compromise seems impossible, it appears another non-specific two month extension of the Oct 1 continuing resolution will be funding the government for the next two months, at which time we hit the debt ceiling, & things could get interesting...

the unemployment rations extension that's part of the tax bill is just an extension till next Dec 31 of the qualifying dates for the four tiers of rations that have been on & off all year...it doesnt do anything for those who have been unemployed since the depth of the recession, the so-called 99ers, or for those living in a state not eligible for all four tiers of rations...i've included a graph below (click to enlarge) that is illustrative of this problem...as you can see from that graph, the majority of the layoffs started occurring just under 99 weeks ago, and as those laid off then reach that 99 week threshold, they will be without any safety net...

treasury bond prices continued to erode this past week, and the benchmark ten year yield is now nearly a percent higher than before QE was initiated...30 year mortgages now average 5 1/8 plus a point, which means that a home buyer's monthly payment on a fixed 30 yr mortgage on the same principal would be 9% higher than in october...here's a set of charts tracking those benchmark interest rates...the spread between corporate junk bonds and treasuries is now the lowest since 2007, but yields on top-rated tax-exempt securities due in 30 years are climbing twice as fast as those on U.S. Treasuries, reaching the highest level in almost 16 months; part of this is due to the expiration of the build america bonds program from the original stimulus package...for states & municipalities, this means the cost of their borrowing now averages 19% higher than october... i dont usually follow weekly wiggles in the markets, but im mentioning the T-bonds market again because they're the best litmus test i have for the effectiveness of QE, and because theyre a barometer for how the tax cuts are being received by the funders of the US debt...ie, foreign purchases of long term US assets totaled $27.6 billion during the month, compared with net buying of $77.2 billion in september...there are some apologists now opining that the higher interest rates are a sign of recovery, but none of them said that was what was supposed to happen when QE was introduced... if high interest rates are a sign of recovery, life must be a real bowl of cherries in greece & ireland...one would think they would see their scheme is producing unintended consequences, but the FOMC statement was unchanged, so the Fed is clearly not planning to reverse itself...

there was some celebration because retail sales ex-gasoline have now hit a new nominal high; yet we have ten percent unemployment, 20% if you count those underemployed...one out of six have been unemployed in the last 18 months, and 17% are working in a lower paying job out of their field...so who could be pushing retail sales back up? for the most part, it must be the same people who will be getting an average of $129,000 in tax cuts when the bush cuts are renewed...maybe if we all get lucky, they'll trickle down on the rest of us...

the financial crisis inquiry commission, a bipartisan investigation created by an act of congress in may 2009, took an orwellian turn & splintered into partisan disarray this week when the republican members walked out after their attempt to ban the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report was defeated 6-4...they will publish their own report blaming the entire financial crisis on barney frank, fannie mae, and poor subprime borrowers who lied on loan applications, thus precipitating the housing bubble in the US, canada, spain, ireland, australia and the rest of the world, and taking down the unfortunate banks who had bundled those mortgages into tranches of otherwise AAA products, thus necessitating a multi-trillion dollar bailout...the banksters were just innocent victims, the crisis was all was the result of a socialist conspiracy against the banks...apparently as salve for the banksters wronged by this dirty commie plot, the incoming financial services committee chairman baucus of alabama assured them that it was now washington's job "to serve the banks", and the SEC, which needs to hire 800 new investigators to handle its prescribed job under finreg, apparently will not be funded for those extra hires...

china announced it would further limit supplies & raise export tariffs on certain rare earths starting next year, renewing worries about a supply crunch or the materials necessary for various energy technologies including wind turbines and electric vehicles; facing a diesel fuel shortage, the world's largest energy user boosted net imports of crude oil 26% in november from a month earlier, as china's refiners increased crude processing to a new record; oil prices had been under pressure because it was assumed china would tighten, but they rose when china reversed itself & decided to raise inflation targets instead; copper prices hit a new all time high, as it was revealed that one unidentified company holds at least 90% of the london metal exchange inventory (LME rules force metal lending at fixed rates, so shortages will not occur)

the UN climate summit concluded with an agreement to curb climate change, with $100 billion a year in aid promised to developing nations by 2020, it protects forests and outlined methods to verify cuts in fossil fuel emissions, although no new targets for curbing greenhouse gases were set...the kyoto protocol was not renewed & the agreement is not binding; but they will meet again next december in durban, s.africa to try to make some further progress..the results remind me of similar conferences in the 80s, when it was always decided that further study was needed and a meeting was set for the next year...NASA determined that the 2010 meteorologicalyear, which ended november 30th, was the warmest on land & worldwide in their 130-year record, surpassing the record set in 2005...worldwide, november was 0.96˚C warmer than the benchmark 1951 to 1980 average ...& in case you're wondering why its been so cold recently, we're under the influence of a negative arctic oscillation, which dumps cold air into the eastern US and drives the warmer air northward; hudson bay was still 90% ice-free at the end of november & greenland has been 18°F above normal...i've been on this case a while, but i cant get too excited about climate change anymore...there are more immediate problems facing us than the environment, and i think the climate change story is already written and irreversible, and whoever's still around just have to deal with it when manhattan floods in 50 years...

there was a major summit of the 27 members of the EU on thursday, where they pledged to do whatever is required to defend the euro, but no details of what that whatever might be were forthcoming; the E-bond proposal was blocked my the northern countries, & despite calls by ECB president trichet for maximum flexibility, no increases in the EU’s €440bn rescue fund were announced; operating autonomously, just like our Fed,the ECB stepped up purchases of peripheral country bonds by nearly 50% this past week and planned to double its capital base in preparation for dealing with nearly €300 billion ($400B) in total refinancing that will be needed by spain next year; portugal worried that with the "avalanche" of debt to be issued next year, it might get shut out of the bond market...moody's downgraded irish debt five notches, and put spain on credit watch...just about the time that the general strike in spain was winding down & air & ground traffic there was being restored, greece was hit with its seventh general strike this year, shutting down factories, bus & truck transport and the athens airport...widespread firebombing & clashes with police broke out in the city...similar riots broke out in rome when the conservative prime minister survived a vote of confidence in the italian parliament, with 90 people, including 50 police, treated for injuries...as words are insufficient to describe the rioting, here's a link to videos of Riots in Athens and Rome

This graph shows the change in payroll jobs each month. The peak job losses were in early 2009 - and 99 weeks is just under two years - so many of those people will be exhausting their benefits over the next few months. click graph to enlarge>>>>>>

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

This short film by American director Ramin Bahrani (Goodbye Solo) traces the epic, existential journey of a plastic bag (voiced by Werner Herzog) searching for its lost maker, the woman who took it home from the store and eventually discarded it. Along the way, it encounters strange creatures, experiences love in the sky, grieves the loss of its beloved maker, and tries to grasp its purpose in the world. In the end, the wayward plastic bag wafts its way to the ocean, into the tides, and out into the Pacific Ocean trash vortex — a promised nirvana where it will settle among its own kind and gradually let the memories of its maker slip away.

Monday, December 13, 2010

unless you've been living under a rock all last week, you certainly must have heard of the tax cut plan obama (R-white house) negotiated with sen. mitch mcconnell, representing the 42 member republican majority in the senate; basically, GOP/obama plan is a agreement to renew all the bush tax cuts for the rich for two years so that they can be made permanent when there are fewer democrats around; it also keeps the dividend & capital gains taxes at 15%, exempts all estates under $5 million from the estate tax, allows businesses an upfront deduction for equipment purchases, in lieu of depreciation, for 2 years, extends some tax credits that were part of the 2009 stimulus, extends unemployment rations for those who have been unemployed for 26 weeks for up to 13 more months, and substitutes a 2% cut to payroll taxes for the expiring making work pay tax credit...it'll cost something in the neighborhood of $900 billion, which is more by itself than many of the deficit cutting plans so popular last month would have cut from the budget...

while i was somewhat ambivalent about it when it was first made public, the more i've learned as the week progress, the more bitter its taste has become... much of it disturbed me immediately, especially bush tax cuts & the estate tax exemption, but i vacillated, as it seemed there was no way we could have got unemployment benefits without some kind of deal... so many opportunities to act unilaterally were squandered before the midterms; everyone knew the bush tax cuts were to expire, so even a year ago this could have been taken up while everyone was otherwise distracted by healthcare reform, before we got backed into this corner, and an entirely middle class tax plan could have been put in place before the waters got muddy...

some promoters of the GOP/obama plan are calling it a stimulus & jobs creating bill...but when you think about it, it's really a status quo bill, in that it leaves in place much of the policy has been in place for this past year...you can argue that without it, GDP might decline and unemployment rise marginally, but to argue that it adds anything to what we already have in place is a stretch....we you consider that about $129 billion of it will go to the richest million americans, or about $129,000 for each, the jobs it might create are those for cleaning ladies, nannies, gardeners & upscale retail clerks...for the most part, its all going into consumption, which is the last thing we need...we'll be borrowing from china to fund this so that we can buy their merchandise...at least the unemployment rations stand a chance of being well spent, at midnight at walmart, on milk, bread and baby formula...

there are better ways to stimulate: when the first stimulus was being discussed, Mark Zandi, chief economist for Moody’s, calculated which stimulus programs give the most bang for the buck in terms of the economy:

as you can see from his bar graph, except for the unemployment rations & the payroll tax cut, everything else in this GOP-obama plan has a negative economic return...

& there are other problems; one is the payroll tax cut, which will decrease funding for the social security trust fund by $120 billion annually, giving the next catfood commission more ammunition when they go after it next time...also, by substituting the payroll tax cut for the making work pay tax credit, those families making less than $40,000 annually will actually get less of a tax cut than they did these past two years...on the other hand, those making over $95,000 who were ineligible for 'making works pay' will now get that extra 2% cut..

another problem is that the stimulus funding to the states will be withdrawn, a stealth GOP plan to bankrupt populous democratic states and break their public employee unions...another problem for the states comes from the estate tax exemption; most states had written estate tax collection assumptions into their budgets, which now wont materialize' the tax foundation estimates just over 9000 estates will now be taxed next year under this bill, rather than the 82,000 that would have been taxed without this action..

when and if this bill is passed it will do nothing to help the million and a half americans who've been out of work for more than 99 weeks, and since there are 6 million who havent worked in a year, with a 13 month rations extension more could fall thru the safety net as the year progresses...estimates are that over 4 million will still lose their rations over the next year...

as of friday, democrats in the house were almost universally opposed to this bill, but many of the objectors in the senate had already been bought off with a raft of earmarks...so far, ive read of subsidies, grants or other benefits for wind and solar power, liquid coal fuels, online poker (to be run from nevada), ethanol (45c/gal), biodiesel ($1/gal); there are also benefits included for everything from the film and television industries to mining companies & rum producers...noone, not even congress staffers, really knows what's all in the first draft of the bill set to be voted on monday, but as far as i know, there isnt yet a cornhusker kickback or louisiana purchase, but with hundreds of congressmen who's votes have not yet been bought and paid for, who's to say what ornaments will be added to this tax cut tree before christmas...

krugman and others have pointed out that most of these tax cuts are now scheduled to expire in 2012, which poses the same problem congress has had with dealing with them this year; any attempt to rationally rescind them will run into election politics, and no one will want to take the blame for necessary tax increases going into the election; ... i have no idea what the outcome of our fiscal dilemma will be; but its hard to the believe the Fed will print money for congress to spend for all eternity...

and it was also obvious to the bond market that this mcconnell-obama plan is counter-productive to getting our fiscal house in order; in the two days after it was announced we experienced the worst sell-off of US notes & bonds since the lehman collapse; ill include here a chart for the movements in ten year Treasuries, which are the benchmark for mortgage rates and bonds worldwide, to show you the damage...5-year notes were similarly hit, up 63bp and 30-year notes were up 30bp; some mortgage rates are a full percent up from their october lows...similar losses were experience by japanese, british and european bonds (recall that bond prices go down when yields go up)...a german bond auction failed to attract sufficient buyers for the 4th time in 2 weeks as 20% of the proposed offer had to be withdrawn...

as you can also see on the chart to the right, interest rates have been rising almost since QE2 has begun; some apologists for QE2 say thats good, it means inflation expectations will spur growth...you can believe that if you want, but try telling it to a potential home buyer who is suddenly faced with the prospect of paying nearly a percent more for a home loan...

the above is from the weekly comments that accompany my sunday morning links mailing, which in turn is selected from my weekly blog post on the global glass onion; that blog contained nearly 100 links to news & commentary regarding that plan this past week; you can find those in the first third of that post…if you’d be interested in getting my weekly emailing of selected links, mostly from these GGO posts, contact me...

Monday, December 6, 2010

i was almost stunned by the november unemployment report: only 39,000 jobs were added and the rate was up to 9.8%...im usually more bearish than the average bear, but i have to admit the severity of the reversal surprised me...new claims for unemployment had been trending down, almost all the regional Fed reports as well as ISM surveys had been positive, so at worst, i expected a neutral report...but i can still offer my usual positive spin; if you recall last months positive report, i noted that in part it was due to early seasonal retail hiring; well, this month that normalized and, due to the normal seasonal adjustment, 28,000 more jobs evaporated; there have really been something on the order of 300,000 season hires so far this year, and the adjustment parallels what BLS has determined to be normal, thereby reducing employment; this is all reversed in january, when those seasonal temps are let go, and the figures will adjust for that too, so january may well look positive even when all 300,000 are let go...anyway, the complete numbers & charts are among the first few links below, so you can get the details there...i just want to focus on one number; thats the 6.8 million american that have been unemployed for over 26 weeks...on nov 30th, the unemployment stipends for those long term jobless expired, and it's expected that rations will run out for 2 million of them by the end of the year...as the tiers of rations that each are in run out, more will be added each week thereafter...and to those without any safety net, we should add the 1.3 million who have been without work for more than the maximum 99 weeks, a number growing every week now that we've passed the 2 year mark for the crisis...as it stands this weekend, the democrats are trying to make a deal; the republicans get the bush tax cuts for the rich, the people get unemployment rations re-instated...if such a deal can be worked out, a million dollar CEO would get $46,000 in benefits, the richest 0.1% of taxpayers would get an average tax cut of $370,000 -- and the unemployed would get a $290 a week ration...but that aint even a done deal, as republicans have already said that they'll block all activity until the bush tax cuts a for the rich are extended...if the rations dont get passed, this would be a good time to start thinking about a donation to a food pantry, hunger center or homeless shelter, because they'll sure be needing all the help they can get...and it aint looking up either, because according to the challenger job firm, corporations are planning the most job cuts that they have in the past 8 months...

prior to the GOP imposed gridlock, the senate voted for the 11th time to postpone for one month a scheduled 23% cut to physicians treating patients under medicare, that would have been imposed under a 1997 law which attempted to tie doctor's pay to inflation; they also passed a food-safety bill pushed by agri-business which would control trade in home-grown produce, but due to a turf violation of a constitutional provision requiring that tax provisions originate in the house, house democrats are expected to block it by a legislative maneuver...oh well, at least there wasnt anything important congress had to do before the holiday recess..

the biggest news this week was what happened over two years ago...to partially comply with the 'audit the Fed' provisions in the dodd-frank reform bill, the Fed released the details of three of the Fed’s six emergency facilities which were run by the Fed during the financial implosion of 2008...taking toxic junk as collateral, the Fed sent out it's worldwide fleet of money-dropping helicopters & loaned or otherwise made available $3.3 trillion to banks, hedge funds, the international wealthy & elite, and even corporations like Caterpillar, Harley-Davidson, General Electric, McDonald’s, Toyota and Verizon...of the top 11 recipients of Fed cash, 6 were foreign banks...as dirty as all this laundry is, the Fed is still keeping the details of three of its facilities secret, ostensibly because it would damage the reputations of some mega-banks...links to the articles detailing these programs are right at the beginning of this weeks blog post..

investigations into mortgage fraud and MBS probes continued, with Fed governor tarullo testifying that she ees big put-back costs for banks, but declining to opine as to if the problems are a systemic risk... the double-dip in housing prices has officially begun with the release of the case-shuller index for sept, covering the 3 summer months, and finally gaging the impact of the end of tax credits...U.S. home prices fell 2% over the previous release, and indications are for further prices erosion going forward as the months of inventory on the market remains in double digits...

the EU imposed rescue of ireland was completed this week, and the irish were forced to pledge their €17.5 billion public pension fund as part of a €85 billion rescue package of irish banks to bail out british and german banks...there was no haircut for the bondholders as had previously been hinted at...part of the problem with bond haircuts is bank interconnectedness; a 20% haircut on greece, irish, spanish & portuguese bonds that french banks are exposed to would wipe out french bank equity....so the package didnt solve the contagion problem, as by mid-week bonds of ireland, portugal, spain, belgium and italy were all at new high yield spreads from the benchmark german bonds...by the end of the week pension funds in hungary & france were also seized by their respective governments...to break the panic in the bond markets, the ECB started buying peripheral debt & offered "unlimited cash" for 3 Months at 1%...analysts expected the intervention might eventually be as much as 1 to 2 trillion euros, or about $2.6 trillion dollars, four times the size of our Fed's QE2 program...but the ECB siad it's not the same as QE, as their bond purchases would be sterilized by otherwise removing liquidity from the markets...ive tried include a representative selection of links to this here, but there's probably at least six dozen on the euro-mess at the end of this week's blog post, if you want to see them all...overall, bond markets experienced their worst month in november since the lehman collapse, with even investment grade bonds such as walmart getting hit from euro-contagion

a new study of global feedback mechanisms published by the oxford physics department to coincide with the start of a new round of international climate talks in cancun predicted global temperatures could rise 4C, or 7.2F degrees by 2060...largely due to the rising release of greenhouse gases from the tundra & arctic ocean, this would cost up to a billion people their homes, disrupt weather, rainfall, & crop yields, and require an annual investment of $270 billion to protect major cities against rising sea levels...a lot of people are gonna be surprised when they find out that gaia doesnt do bailouts...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

Monday, November 29, 2010

Sunday, November 28, 2010

if the Fed's quantitative easing was supposed to bring down borrowing costs, it's not working...2, 7, 10 and 30 year auctions of Treasuries have all come in at a higher interest rates than previous to QE2...this week a $35 billion 2 Year bond came at a .52% high yield, substantially more than the previous .40%...not only are the primary dealers in treasuries front running the Fed's buying schedule, but so are the bond funds, including PIMCO, the world's largest, and the chinese...moreover, the treasury/MBS spreads are at their highest in a year, meaning that mortgage rates will be higher...possibly front-running the expected ron paul Fed investigation, downtown denny kucinich has called for a congressional hearing on QE2, where he is expected to grill bernanke as to why the Fed is unable to change the jobs picture...

the major news in the mortgage mess related to a bankruptcy case in new jersey, where testimony revealed that countywide (now a unit of BofA) had not been conveying the notes to MBS trusts for at least 5 years; according to mortgage law experts testifying before congress, not only does this put the validity of those securities into question, but it also could raise questions about the titles to nearly every property transferred since the electronic registration system has been in use...even without the results of that case, analysts at realitytrac indicated the potential bank liability for MBS putbacks would be "enormous", subsequently analysts at barrons tried to put an number on that enormous & came up with $134B...on delinquent mortgages, the average number of days without a house payment before foreclosure is initiated is now 492 days, and in florida and new york most can count on staying in their homes free for 20 months before foreclosure...

a mixed batch of economic reports came out this week; existing home sales were down 2.2% for october, new home sales down were 8.1, first time claims for unemployment were the lowest of recession, but durable goods orders were the lowest in 18 months...forecasts from the minutes of the nov 2-3 Fed open market committee meeting, the one that hatched QE2, were also released this week; they forecast that it would take several years for the economy to return to normal growth; that unemployment would remain around 9% next year, and not fall to 8% until the end of 2012...

as i mentioned last week, the official CPI that came out at .6% seemed a little suspicious to me, and i wondered if the methodology to arrive at that number might reveal how that obfuscation was arrived at; i wasnt the only one; two analysts at ritholtz's blog did the digging for me (here and here)...as i suspected, the housing component of inflation has put a downward bias in the official figure over the past couple years; if you take the housing out for that period, our inflation has been 1.9%...that alone is close enough to the Fed inflation target to call into question the entire QE2 charade of attempting to head off deflation; moreover, QE2 is already inflating the commodities, affecting the prices of food & energy, which aren't even included in the "core inflation" that the Fed is looking at...in addition to this recent effect, the BLS method of computing inflation has changed over the past three decades to remove items which might result in "extreme values and/or sharp movements of prices" such as the cost of trucks, cards and textbooks...there are enough changes often enough to make the official figures meaningless...john williams at shadow stats estimates that if the BLS used the same methodologies for compiling the CPI today that it employed in 1990, the government’s number would be 4.5%; if they used the same methods as were used in 1980, the official CPI would be 8.5%... so why would the government want to deceive the public about inflation? there are automatic pay increases tied to the CPI written into many government jobs, pensions, and labor union contracts, and an annual cost of living adjustment to social security is also tied to the CPI...you didnt think it was to screw the banksters, did you?

as was indicated going into last weekend, the bailout of ireland to bailout german and british banks was enforced last sunday, with the IMF, EU, UK & sweden pledging loans of 90 Billion euros at below market rates (reports of amount & rates vary)...existing irish 10 year debt rallied briefly to yield below 8%, but it was above 8% within 24 hours and back above 9% by midweek...the eurozone focus almost immediately shifted to portugal, which has always been in the high risk category, and by extension, to spain, as portugal's biggest creditor is spain...the EU pressured portugal to accept bailout funds, but portugal said the EU cant force a bailout on them (echoing ireland's position last week)...portuguese debt cost more than 7%, and spanish debt hit a new high @ 5.2%...with speculation that both might eventually need a bailout, it became obvious that the trillion dollar financial facility put together during the greek crisis would be inadequate...the european commission floated the idea of doubling the promises in that fund, but was vetoed within hours by germany...the portuguese government passed an austere budget with severe cutbacks and a countrywide strike disrupted fuel supplies & shut down the country...belgium, with irish bank exposure at 5% of GDP and no functioning government, and italy were also mentioned as possible problems, and by friday the FT noted even france was seen at risk, as a star french soccer player called for everyone to withdraw their money from banks on Dec 7th...lost in the shuffle was that greece was not meeting its deficit reduction targets promised during the summer...the spillover from ireland made it difficult for european governments to obtain funding; both germany & hungary were unable to sell the amount of bonds they took to the market, & even china also failed to meet its sale target in a one-year note auction...short term spanish debt demanded twice the yield of a month ago, italian costs rose, and spanish electric & russian bond offers were withdrawn...all this & more is documented with about a hundred euro-related links at the end of this week's blog post...

some americans reporters & writers seem to be lumping the european problems into a package, as if all countries there were all inflicted with the same disease; but irish situation is not at all like that of greece; greece had a bloated government sector and ran excessive deficits going into the crisis, then had goldman contrive a deceptive swap deal to hide it's actual debt, ireland, on the other hand, had the lowest debt to GDP ratio (12% - germany's was 50%) of any country in europe going into the crisis; their problem stemmed from the world's biggest housing bubble and overextended, undercapitalized private sector banks, which the government first bailed out, then nationalized...portugal also has a large unionized public sector with higher debt to GDP ratio by virtue of borrowing for major infrastructure investments, whereas the problems with spain stem from a real-estate bubble that has deflated more than ours, subsequent 20% unemployment, and the extend & pretend of their insolvent cajas, or savings & loans...this summer, those spanish cajas passed the same euro stress tests the irish banks passed...spanish public debt, on the other hand, is only 53% of GDP - half the level of italy’s...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

Tuesday, November 23, 2010

the debate about the effects of the 2nd round of quantitative easing, which had been ongoing among the financial & economic blogs, became partisan this week...it was almost as if that obama's defense of QE at the G20 meetings last week prompted a knee jerk reaction from the right...first, a number of republican economists published a letter in the WSJ attacking QE, then pence of indiana & corker of tennessee introduced bills to have the Fed stripped of its mandate to strive for full employment, then even sarah palin suddenly became a monetary policy wonk, criticizing bernanke for inflating the price of groceries...of course, the chinese have also continued their attacks on QE; one effect of the weaker dollar in combination with the approximate chinese peg to it is to raise costs in china, and since food is a larger part of the typically chinese budget, their inflation rate has been increasing accordingly...as a result, this week food price controls were announced accompanied by penalties against those caught hoarding...also caught by the weakening dollar are other countries with similar large dollar reserves; both the thai prime minister & the asian development bank came out favoring using the yuan instead of the dollar for trade in asia, while a UN report advocated switching to IMF drawing rights..

one of the stated aims of QE is to bring down long-term interest rates, ostensibly to encourage borrowing demand, but those lower rates arent whats happening at all: yields on the benchmark 10-year treasuries rose during the first week of QE by the most since last december, up 26 basis points, or 0.26 percentage point, to 2.79 percent...so what's really happening? the NY Fed publishes its buying schedule, the primary dealers in Treasuries, which are the mega banks, front run the Fed schedule, then profit by selling to the Fed, & then the bonds sell off...just more evidence that all QE is just another stealth bailout; all its about is recapitalizing the still insolvent banks...

the simpson-bowles deficit plan which was released last week has spawned a number of other budget plans and has been taken up by two major papers a well; first the NY times published an interactive budget game, where readers could pick their own fiscal choices, a combination of spending cuts and tax increases, and later in the week the Economist ran the US budget as a cover story...another bipartisan plan was also released, this one by alice rivlin and pete domenici, & paul ryan's medicare plan resurfaced for further discussion...one libertarian tax plan, called the fair tax, proposes across the board sales taxes of 23%, eliminating the income tax altogether...according to wage stats for 2009 from the SSA, 66% of all Americans made less than $40,000, while half actually made less than $26,261...these are the people who live paycheck to paycheck, who spend all they earn, so rather than being fair, such a tax system would be diminish the standard of living most people could afford after paying those taxes; & thus the so-called "fair tax" would effectively put 1/2 the population below the federal poverty threshold...

here's an earlier much more detailed interactive of the proposed 2011 budget: http://www.nytimes.com/interactive/2010/02/01/us/budget.html; it came in at about $1.4 trillion above expected revenues...i remain unabashedly in favor of soaking the rich...i'd let the bush tax cuts expire & then some...the bush tax cuts, mostly for the rich, are scheduled to EXPIRE; they cant be renewed without support from the democrats & obama...it's clear that tax cuts, especially for the rich, dont do much to stimulate the economy, on the other hand, each dollar spent on the expiring unemployment rations, which were defeated in congress in the first vote this week, would generate about $1.60 in new economic activity...never before this year have we allowed extended unemployment benefits to expire when the unemployment rate was above 7.2 percent...

what had started as a congressional investigation into foreclosure fraud when the robo-signers scandal erupted several weeks ago ended up in hearings before the banking committees in both the house & senate this week, and more evidence that the notes were not properly conveyed to the RMBS trusts came to light...there was a lot of talk about systemic risk if the MBS market collapses, so i'm getting a sense another retroactive re-write of the laws or similar bailout is in the works...on foreclosure fraud itself, there are class action lawsuits against the banks now ongoing in at least a half dozen states (scroll down to my notes in red for links to videos of robo-signer depositions and the flowchart of the securitization of just one mortgage) ...the mortgage bankers assoc reported that 13.52% of all loans were either delinquent or in foreclosure in the 3rd quarter; the delinquency rate actually declined, in part because of the increase in the number of houses foreclosed on...

the euro-mess became harder to follow this week; one day, a statement would made suggesting that ireland was on the way to accepting a bailout, the next day, or even the same day hours later, there would be an denial of the same; but near the end of the week it became clear a bailout was on the way; a financial swap team from the IMF, the ECB, & the european commission was said to have "parachuted in" to ireland to negotiate (read impose) terms of a bailout...it's estimated that $650 billion is at stake in terms of loans from german & british banks to ireland & it's banks...earlier in the week, 60billion euros was being mentioned, now it appears the bailout figure will be 100 billion euros, or $136 billion dollars, with 13% of that supplied by the UK...100B euros is about 60% of ireland's GDP; so its roughly the equivalent to the US getting a bailout of $9 trillion; almost lost in the irish shuffle was that greece had failed to meet its targets under its bailout, with a deficit of 15.4% of GDP, and another restructuring was being discussed there, and the OECD said that poland and slovakia needed a similar deficit reduction to greece & ireland; also, a bloomberg analysis showed that 33 eurozone companies are less risky than their governments, including six each in italy & spain... both simon johnson and roubini have been reading the tea leaves to see the underlying patterns here; and it appears that portugal will be next to need a bailout, and spain, still with 20% unemployment & a housing crisis worse than ours, is the elephant in the euro-room; if spain goes, europe would have to ask for help, and johnson believes it wont come from the US, that only china has a big enough pile of reserves to bailout a crumbling europe and impose its terms...there are at least 5 dozen links to euro-mess stories at the end of this week's blogpost...

other news notes, just listed:

early in the week, the NYTimes ran a front page story by ocean studies experts that due to rising ocean levels, major coastal infrastructure should be planned anticipating a sea level rise of 2 meters (7 feet) this century...you can argue about whether its anthropogenic or not, but it now seems certain that glacier melt, especially in greenland, is having an impact on ocean levels...

the one year boom in solar and wind power projects may be coming to an end, as the stimulus money, which supplied outright grants of up to 30% of the cost of such projects, is running out...

the NY Fed manufacturing survey recorded the sharpest drop since 9-11: the new orders index fell 37 points to -24.4; prices received have turned negative

possibly due to euro contagain, or a big california bond issue, a full year of gains in the municipal bond market has been wiped out over the past 2 weeks...

the october inflation rate was reported as 0.6% annualized, the lowest since '57...i have a feeling that the declining cost of housing skewers that, but i havent seen those figures broken out...the price impact of the new model cars is incorporated in the october index each year as well, so even though new car prices rose last month, they rose by less than in previous years..under the seasonal adjustment process, that translates into a lower price.

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, mostly from the aforementioned GGO posts, contact me...

Monday, November 15, 2010

David McCandless turns complex data sets (like worldwide military spending, media buzz, Facebook status updates) into beautiful, simple diagrams that tease out unseen patterns and connections. Good design, he suggests, is the best way to navigate information glut -- and it may just change the way we see the world.

Monday, November 8, 2010

as you can see from the above, some in the blogosphere as well as many in the business & financial worlds have had their knickers in knots over the prospect of the Fed's announced quantitative easing this past week; some are even talking like its the end of the world, that tomorrow we'll all wake up in zimbabwe...

let me try to put it in perspective; the announced QE2, which amounts to a total purchase of $600 billion in 2-10 year Treasuries, represents roughly a 25% increase in Fed assets; that's only about a third of the size of the first QE, which came 2 years ago at the height of the crisis, when the Fed almost tripled its balance sheet assets from around $875 billion, to near the current $2.3 trillion (here's a graphic of that)...we went thru all this hyperinflation hype back then, too, and what has materialized so far? while at $75B a month plus reinvestments they may be covering most of the treasury issue over the planned 8 month effort, they're not hardly monetizing the total publicly held debt, which is $8.6 trillion...

my sense of what might happen is that QE2 will drive a commodities/market bubble and not affect unemployment, the publically stated objective…the fed will be buying medium term treasuries, driving down their yields; in turn, those big bond funds, such as PIMCO (with $1.2 trillion) who are now in treasuries will move their funds to other markets, possibly into corporate debt or emerging market bonds, chasing a higher yield…the liquidity thus produced eventually works its way into equities and commodities; to an extent, its already happening; global stock markets have already hit a 25 month high...and to the degree that commodities play into prices you might see some price increases at the street level…although wheat is up 60%, its down from it’s high following the heat wave & fires in russia; corn is also up, but the ethanol subsidy is partly to blame for that…but even though corn and wheat are both up over 60%, theyre still a minor cost in food; the cost of wheat in a loaf of bread is only a few cents...& although cotton is up 80%, at a record price, that's also largely the impact of bad weather in china, india & pakistan...similar weather related issues are affecting coffee's high...while most of the metals are near year highs, the more serious threat for street level inflation would be if we get a spike in the price of oil, since transport costs affect everything...the dollar weakening attendant with QE, which has already taken place in anticipation, will make imports more expensive; but since china, for the most part, still has it's yuan pegged to the dollar, most of what you buy wont see much price appreciation, unless you're into buying a lot of gold and silver trinkets...

im still thinking a big part of this new round of QE is the ongoing bailing out of the banks, which i detailed here: banks insolvent? extend and pretend…(see the last paragraphs in red), and is still a problem as long as the toxic real estate bonds are still carried on banks books at cost, rather than their market value...as recently as six months ago, all the discussion of monetary policy concerned what would be the exit strategy to unwind the first balance sheet expansion, so despite the public pronouncements of not meeting their targets for inflation and unemployment as the reason, i'd tend to believe the bank balance sheets have probably deteriorated further in the face of deteriorating commercial & residential MBS...thus keeping rates low will continue to allow the banks to recapitalize, but its still a pushing on a string effort for the general economy; just like the first QE was, there will still be no incentive for the public or business to borrow at 1/2% lower rates when the public is overextended already & businesses are still below capacity…so without accompanying fiscal policy there will be no increase in spending, and no boost to the overall economy…and remember, the Fed will have to eventually try to reverse this, and that's where the game really gets real tricky...

the above is adapted from the weekly comments that accompany my sunday morning links mailing, which in turn is selected from my weekly blog post on the global glass onion; that blog contained over 100 links to news & commentary regarding QE this past week, and you can find those near the beginning of that post, as you typically can for other posts from previous weeks…if you’d be interested in getting my weekly emailing of selected links, mostly from these GGO posts, contact me...

Dr. James Schlesinger served as Chairman of the Atomic Energy Commission (1971-73), Secretary of Defense (1973-75), Director of the CIA and was the first Secretary of Energy (1977-79). His wealth of experience at the highest levels of public administration is consolidated by his octogenarian wisdom.

Monday, November 1, 2010

The Coffee Party is alarmed that our discourse has been hijacked by Partys named after other Beverages. The Coffee Party is for all the reasonable people, which happens to be correlated with drinking good coffee.

Here is our manifesto:

The Coffee Party has had the privilege to meet people from many different creeds and races, and despises fear-mongering towards any one group.

The Coffee Party also hates xenophobia towards immigrants. We don’t plan to vote for any candidate who first exploited an immigrant for nine years and now wants to deport her.

And ixnay on Yet Another Xenophobia aimed at particular trading partners, falsely blamed for our economic woes. The Coffee Party likes free trade — how else are we going to get our Coffee?

While we’re at it, we don’t want Homophobia or Misogyny either.

The Coffee Party wishes the tax debate would also discuss whether we are getting our money’s worth. We have a tax-bloated government here at Coffee Party HQ, so why did they cut the one government activity we actually find useful – subways!?#!

Suppose you had to make an agonizing decision whether to endanger the mother of your child by going through with a pregnancy. Pick one: (1) you and the mother should decide yourselves, (2) some Old Fart on a Bench or Legislature should decide for you. The Coffee Party does not consider this a difficult pick.

The Coffee Party wonders why all candidates from all parties have forgotten to mention that we are still waging war for reasons no longer clear, not to mention still violating civil liberties of both citizens and foreigners?

Speaking of wars, how about ending the War on Drugs, which is so destructive to our inner cities and to the source countries? (link to Nick Kristof){Wait a minute, we could even tax pot and restore subway service! (see 5) }

Our country is based on the ideals that ALL “are by nature equally free and independent,” and have “inalienable rights, among them life, liberty, and the pursuit of happiness,” men and women, blacks and whites, gays and straights, immigrants and natives, Christians and Muslims, citizens and foreigners, rich and poor. The Coffee Party wants our country back.

note on the graphs used here

in March a year ago the St Louis Fed, home to the FRED graphs, changed their graphs to an interactive format, which apparently necessitated eliminating some of the incompatible options which we had used in creating our static graphs before then...as a result, many of the FRED graphs we've included on this website previous to that date, all of which were all created and stored at the FRED site and which we'd always hyperlinked back there, were reformatted, which in many cases changed our bar graphs to line graphs, and some cases rendered them unreadable... however, you can still click the text links we've always used in referring to them to view versions of our graphs as interactive graphs on the FRED site, or in the case where an older graph has gone missing, click on the blank space where it had been in order to view it in the new format....